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Tuesday, 2 June 2015

Russia’s Sberbank to launch Islamic banking

At a shareholder’s meeting on May 29, Sberbank’s CEO, Herman Gref, unveiled plans to introduce Islamic banking in Muslim areas across Russia. With a majority Muslim population, the Russian republic of Tatarstan is considered as key in the strategy.

As Russia pivots from west to east, the move hopes to attract morebusiness and capital from Arab countries. “We will actively promote the development of such a tool as Islamic banking, as it opens up a good opportunity to work with international partners amid sanctions,” Gref is reported as saying during the meeting.

Given the rising demand for Islamic banking tools from a growing Muslim population that resides in Russia, investors from the Gulf States have shown their willingness to set up hedge funds in order to facilitate the implementation. The details of how Moscow will incorporate the Islamic financial framework in conjunction with its conventional system are yet to be revealed.

According to Russian media group, Vesti Finance, if Islamic banking is also rolled out in Central Asia, Islamic financial assets within the region could reach $24bn within just three years.

Sberbank is one of the most profitable banks in the region and accounts for two thirds of revenue earned by the banking sector in Russia. Despite its prominence in the industry, the firm struggled considerably in 2014, with profit losses amounting to 19 percent. The bank’s performance is attributed to an unfavourable economic environment, which stems from the dramatic fall of the rouble’s value, coupled with Western sanctions. “We just made it through one of the most difficult years since 2008,” Herman Gref said during the meeting. “But, it turns out that we were better prepared for this crisis than we were in 2008.”

Islamic banking is based on sharia law and Islamic economics, which rest heavily on the principle that loss and profit are shared and prohibits the collection of interest. Moreover, the provision of company shares replaces the percentage basis, again contributing to the idea that the bank shares risks with the borrower. Islamic banks are barred from financing businesses, projects and trade that are involved in sharia-forbidden activities, such as alcohol and gambling.